Chapter 20—Pricing Concepts
ESSAY
1. Compare and contrast price and nonprice competition. Give examples of firms that compete on a price
basis and on a nonprice basis.
2. How can the price at which a new product is introduced influence the entrance of competition into a
market?
3. What are the implications of a downward-sloping demand curve?
4. Explain what is meant by price elasticity of demand.
5. What are the components of total cost? Give specific examples.
6. Why is the marginal revenue of a product important to the marketer?
7. If fixed costs = $6,000, selling price = $10, and variable costs per unit = $5, what is the breakeven
point in units and in dollar sales volume?
8. Identify and describe the major factors that affect pricing decisions.
9. Discuss the role of product costs in setting prices.
10. What are reference prices and how do customers use them? What is the difference between internal
and external reference prices?
11. What are the differences among value-conscious, price-conscious, and prestige-sensitive customers?
12. How would pricing decisions differ for a business in an oligopolistic market structure as opposed to a
monopolistic market structure?
13. Identify and describe the major types of discounts used for business markets. Then explain the reasons
for using each type.
14. What are the terms of F.O.B. pricing?
15. How can transfer prices be calculated? Give three alternatives.
MULTIPLE CHOICE
16. Price is
a.
money paid in a transaction.
b.
not important to buyers.
c.
of limited interest to sellers.
d.
the most inflexible marketing mix decision variable.
e.
the value that is exchanged for products in a marketing transaction.
17. The oldest form of exchange⎯trading of products⎯is known as
a.
credit.
b.
buying.
c.
purchasing.
d.
barter.
e.
pricing.
18. What do all of the following have in common: tuition, fee, premium, retainer, dues?
a.
They are all usually paid in cash.
b.
They are forms of exchange similar to, but not identical with, money.
c.
They are forms of exchange similar to, but not identical with, barter.
d.
They are different terms for the concept of price.
e.
They have nothing in common.
19. Logan is reading the online report of the tuition and fees he owes for this semester of college. Since he
has signed up for online banking, he pays the amount immediately. The amount Logan just paid is
considered to be
a.
his expenses.
b.
his charges.
c.
his bill.
d.
the price.
e.
the exchange valuations.
20. Price is considered to be the variable in the marketing mix that is
a.
Least flexible.
b.
Most flexible.
c.
Most difficult.
d.
First to be decided.
e.
Last to be decided.
21. What equation shows organizations the relationship between price and profit?
a.
Total Variable Costs + Total Fixed Costs = Sales − Profit
b.
Price = Profit per Item Number of Units Sold
c.
(Price Quantity Sold) − Total Costs = Profits
d.
(Price − Profits) Total Costs = Sales
e.
Total Costs = (Price Quantity Sold) − Profits
22. Price is a key element in the marketing mix because it relates directly to
a.
the size of the sales force.
b.
the speed of an exchange.
c.
quality controls.
d.
the generation of total revenue.
e.
brand image.
23. In conducting an assessment of her accounting firm, Paige discovers the following annual results:
average charge per customer = $250; rent = $12,000; total billings = $150,000; employee
compensation and benefits = $60,000; and other costs = $110,000. Given these results, Paige’s profits
would equal
a.
a loss of $20,000.
b.
a loss of $32,000.
c.
$28,000.
d.
$40,000.
e.
$222,000.
24. Suppose Tommy Hilfiger is introducing a new line of men’s ties. The designer believes that the target
market for these ties comprises men who are very status-conscious. In keeping with this assessment,
department stores selling the ties should
a.
charge a price based on their cost.
b.
charge prices consistent with their existing ties.
c.
discount the ties.
d.
negotiate the price with individual tie shoppers.
e.
use price symbolically.
25. When marketers emphasize price as an issue and match or beat the prices of other companies, they are
using
a.
price competition.
b.
nonprice competition.
c.
comparative pricing strategies.
d.
demand-based pricing.
e.
supply-based pricing.
26. Safe Auto advertises its automobile insurance as “minimum coverage for minimum budgets.” Safe
Auto is engaging in
a.
non-price competition.
b.
demand-based pricing.
c.
competitive pricing.
d.
price differentiation.
e.
price competition.
27. Advertisements for Suave shampoos emphasize that other shampoos may cost more but don’t work any
better than Suave. In this example, Suave is competing on the basis of
a.
product attributes.
b.
product performance.
c.
product price.
d.
available selection.
e.
product packaging.
28. Isabella is a product manager for The Container Store, a retailer of plastic bins and other storage
containers. Sales have been declining in the past nine months and her management team is pressuring
her to compete based on price discounts. However, Isabella is aware of the dangers associated with
engaging in price competition. She knows that competitors can also change prices quickly and
aggressively, which can result in a(n) ____ that will be harmful to both companies.
a.
reduction in cost
b.
price war
c.
competitive game
d.
industry collapse
e.
advertising battle
29. Sellers that emphasize distinctive product features to encourage brand preferences among customers
are practicing
a.
product competition.
b.
nonprice competition.
c.
brand differentiation.
d.
price competition.
e.
competitor differentiation.
30. One advantage of nonprice competition is that
a.
a firm can react quickly to competitive efforts.
b.
market share becomes less important.
c.
a firm can build customer loyalty.
d.
marketing efforts are completely eliminated.
e.
pricing is no longer a factor.
31. Which of the following statements about nonprice competition is false?
a.
Companies that use nonprice competition do not need to keep track of their competitor’s
prices.
b.
A company must be able to distinguish its brand through some unique feature in order to
successfully engage in nonprice competition.
c.
A firm using nonprice competition can build loyalty to both its company and its products.
d.
When using nonprice competition, a company should promote the distinguishing
characteristics of its brand.
e.
Buyers must view the distinguishing characteristics of a product offered through nonprice
competition as being important.
32. A product under nonprice competition would most likely not succeed in the market if
a.
a new advertising campaign is established for it.
b.
it is easy to duplicate.
c.
it is packaged differently from similar products.
d.
it is priced near the competitors’ price.
e.
its quality has been upgraded.
33. For most firms in the United States, demand curves are
a.
upward sloping.
b.
completely horizontal.
c.
completely vertical.
d.
c-shaped.
e.
downward sloping.
34. If Wilson Sporting Goods faces a standard demand curve that exists for most products, as it raises the
price of its tennis rackets, the
a.
quantity demanded goes down.
b.
demand remains constant.
c.
quantity demanded increases.
d.
demand increases.
e.
breakeven increases.
35. For most products, a(n) ____ relationship exists between the price of a particular product and the
quantity demanded.
a.
inelastic
b.
inverse
c.
positive
d.
unknown
e.
elastic
36. A graph of the quantity of products marketers expect to sell at various prices if other factors remain
constant is a
a.
price graph.
b.
supply curve.
c.
price/quantity graph.
d.
marginal revenue curve.
e.
demand curve.
37. When marketers at Consolidated Mustard Company tried to determine demand for their product, they
found that at 50 cents, consumers wanted 2,000 jars; at $1.00, they wanted 6,000 jars; and at $1.50,
they wanted 4,000 jars. What can Consolidated conclude?
a.
Consolidated did poor market demand research.
b.
Consolidated has an elastic product.
c.
Consolidated has an inelastic product.
d.
Consolidated mustard is a prestige good.
e.
Consolidated mustard has a normal demand curve.
38. French Quarter Inns drops the price of a suite from $225 to $195 per night and experiences a reduction
in the quantity of rooms demanded of an average of five per night. This is an indication that suites at
this hotel are apparently an example of a(n) ____ product.
a.
reverse-demand
b.
inferior
c.
standard
d.
secondary-demand
e.
prestige
39. What does the demand curve for a prestige product look like?
a.
It is a straight line where the quantity sold continues to increase as the price of each
product increases.
b.
It is a curve where the highest and the lowest prices yield the greatest quantity sold and
mid-range prices produce the fewest sales.
c.
It forms a curve where the greatest quantity sold comes at a medium price and the
quantities fall as the price increases or decreases.
d.
It forms a straight vertical line because of the prestige of the product, and quantity sold
will remain stable regardless of the price.
e.
It slopes from left to right at a very mild slope; that is, as quantity increases, price
decreases slowly.
40. If Seagram’s marketers found that the firm’s Crown Royal bourbon was a prestige product and raised
its price, which of the following would most likely happen?
a.
The quantity demanded would immediately fall.
b.
The quantity demanded would always increase.
c.
Above some price level, the quantity demanded would begin to decrease.
d.
The demand curve for the product would always shift to the right.
e.
The demand curve for the product would always shift to the left.
41. Which of the following products is most likely to have an inverted C-shaped demand curve?
a.
Visit to the Dentist
b.
Eternity perfume
c.
Starbucks coffee
d.
Pillsbury cake mix
e.
Ford Escape
42. A measure of sensitivity of demand in relation to changes in price is
a.
a demand curve.
b.
a prestige graph.
c.
marginal analysis.
d.
price elasticity of demand.
e.
quantity elasticity.
43. If Carnival Cruise Lines increased the price of its seven-day cruise package by 10 percent and, as a
result, experienced a 20 percent decline in customer bookings, Carnival’s demand would be
a.
steady.
b.
inelastic.
c.
elastic.
d.
prestige.
e.
marginal.
44. Which of the following is most likely to have an inelastic demand curve?
a.
Automobile
b.
Vacation
c.
Nonelective surgery
d.
Recreational vehicle
e.
Computer
45. If a product has an inelastic demand and the manufacturer raises its price,
a.
total revenue will increase.
b.
quantity demanded will decrease.
c.
the demand schedule will shift.
d.
the demand will become more inelastic.
e.
total revenue will decrease.
46. Which of the following statements about price elasticity is false?
a.
Steak is an example of a product that has an elastic demand for most people, because when
price goes up quantity demanded goes down proportionally more.
b.
Elasticity of demand is the relative responsiveness of a change in quantity demanded to
changes in price.
c.
If marketers can determine price elasticity, then setting prices at optimum levels is much
easier.
d.
When price is raised on a product that has an inelastic demand, then total revenue will
decrease.
e.
A product like electricity has an inelastic demand.
47. If Pacific Power and Light increased its rates by 10 percent and experienced a 2 percent reduction in
the demand for power, the demand would be
a.
elastic.
b.
minimal.
c.
minor elasticity.
d.
variable.
e.
inelastic.
48. If a company increased its price from $100 to $120 and the quantity demanded fell by 40 percent, the
price elasticity of demand for this product is
a.
2.
b.
1/2.
c.
−1/2.
d.
−2.
e.
4.
49. Dividing the percentage change in quantity demanded by the percentage change in price gives the
a.
prestige demand curve.
b.
breakeven point.
c.
marginal cost curve.
d.
price sensitivity curve.
e.
price elasticity of demand.
50. Marginal analysis involves examining
a.
what happens to a firm’s costs and revenues when production is changed by one unit.
b.
the extra revenue produced by the sale of one more product.
c.
the extra cost incurred by the production of one more unit.
d.
the difference between marginal revenue and total revenue.
e.
the difference between marginal cost and total cost.
51. Ethan is an operations unit manager for Morningstar Foods. So far in developing his monthly budget,
he has identified the following costs: Overhead at $120,000; Packaging at $70,000; Advertising at
$60,000; Salaries at $400,000; Food production at $90,000, and Distribution at $22,000. The fixed
costs in this situation would be
a.
overhead, packaging, advertising, salaries, food production, and distribution
b.
overhead, packaging, advertising, salaries, and distribution
c.
overhead, advertising, distribution, and salaries
d.
overhead, advertising, and salaries
e.
overhead
52. The owner of Big Bike Motorcycles is opening a new retail location. Which of the following is most
likely to be a fixed cost for Big Bike Motorcycles?
a.
Retail personnel salaries
b.
Advertising on Facebook
c.
Building Rent
d.
Electricity
e.
Transportation of sold bikes
53. The Palasi Candy Company is a small business located in the northeastern United States. The owner
of Palasi Candy is calculating the projected costs for the coming year. There is rent for the building,
salaries for the retail employees, raw materials of sugar, chocolate, and other ingredients, wrappers for
packaging of individual pieces of candy, boxes, and radio advertising. Palasi’s ______ are most likely
to be the raw materials of sugar, chocolate, and other ingredients, as well as the wrappers.
a.
sunk costs.
b.
variable costs.
c.
direct costs.
d.
fixed costs.
e.
marginal costs.
54. If a firm currently produces 2,500 products per month and decides to produce 2,501, it will incur
a.
more fixed costs.
b.
higher average fixed costs.
c.
fewer variable costs.
d.
a marginal cost.
e.
higher average variable costs.
55. Roberts Electronics calculates that if it produces 15 radar detectors, its costs are $1,500, and if it
produces 16 radar detectors, its costs are $1,590. In this instance, $90 is the firm’s ____ cost.
a.
average
b.
fixed
c.
variable
d.
marginal
e.
average variable
56. If Roberts Electronics finds that the average total cost of its radar detectors and the marginal cost of its
radar detectors are both $85, then
a.
its marginal costs are falling.
b.
average total cost is at its maximum.
c.
average total costs are rising.
d.
demand is elastic.
e.
average total cost is at its lowest level.
57. Michelin notices that when the number of tires it sells increases from 1,000,000 to 1,000,001, total
revenue rises $35. The $35 represents the firm’s
a.
average revenue.
b.
marginal revenue.
c.
price elasticity.
d.
average variable revenue.
e.
average total cost.
58. At what point does a firm maximize profit?
a.
The point at which marginal cost equals marginal revenue
b.
The point at which the firm sells its product at the highest price
c.
The breakeven point plus the adjusted marginal cost
d.
The point at which marginal profits equal marginal revenue
e.
The point at which marginal cost equals marginal profits
59. When marginal cost is equal to marginal revenue, the firm should
a.
produce more to increase profits.
b.
produce less to decrease total costs.
c.
stop producing additional units to maximize profits.
d.
provide discounts to encourage purchases.
e.
intensify distribution to increase sales.
60. If Colgate-Palmolive wants to maximize profit on its toothpaste, it should operate at the point where
a.
total costs and total revenues are equal.
b.
marginal revenue is at its highest level.
c.
marginal revenue exceeds marginal cost.
d.
marginal revenue equals marginal cost.
e.
demand is most elastic.
61. At the breakeven point,
a.
the money a company brings in from selling products equals the amount spent producing
the products.
b.
the total fixed costs are exactly equal to the total variable costs.
c.
profits are exactly equal to the difference between revenue and total variable costs.
d.
the marginal revenue of a product is exactly equal to the marginal cost of producing one
more unit.
e.
the marginal cost curve and the average cost curve will be identical for a particular
product.
62. Jared is developing a business plan for a new type of bicycle helmet. He is interested in finding the
point at which the costs of producing the helmet will equal the revenue earned from selling the
product. Jared is interested in finding the
a.
elasticity of demand.
b.
breakeven point.
c.
variable costs.
d.
price elasticity.
e.
the sum of fixed costs.
63. Suppose managers at Caterpillar have determined the costs associated with producing hay balers are
equal to the price that they charge for the hay balers. This indicates that Caterpillar is producing at the
____ point.
a.
breakeven
b.
marginal revenue less than marginal cost
c.
profit margin
d.
competitive price
e.
profit maximizing
64. To determine the breakeven point in units, divide the fixed costs by
a.
total costs.
b.
variable costs time price.
c.
price minus variable costs.
d.
price per unit.
e.
total revenue minus fixed costs.
65. If the product price is $100, average variable cost $40 per unit, and the total fixed costs are $120,000,
what is the breakeven point?
a.
500 units
b.
2,000 units
c.
1,200 units
d.
300 units
e.
3,000 units
66. Markum Industries determines that for its air compressors the following results are achieved at a price
of $250: total costs = $250,000; variable costs per unit = $100; fixed costs = $175,000. Given these
figures, Markum would break even at ____ units.
a.
1,167
b.
1,000
c.
1,750
d.
2,500
e.
700
67. A certain location of O’Charley’s Restaurant has annual fixed costs of $200,000. If an average tab at
the restaurant is $60 and the variable costs per tab is $20, how many groups of customers must
O’Charley’s serve per year in order to break even?
a.
2,000
b.
5,000
c.
10,000
d.
3,333
e.
2,500
68. The Highland Racquet Club found that with annual fixed costs of $60,000, its breakeven point is 2,000
members when the membership charge is $60 per person per year. What is the variable cost per person
for Highland?
a.
$45
b.
$50
c.
$30
d.
$25
e.
$40
69. Abby is marketing consultant who specializes in small businesses. Her current client is very interested
in estimating the costs for the coming year, in order to find the breakeven point. Abby knows this is
an important financial statistic because below the breakeven point, the firm is operating
a.
with fixed costs only.
b.
with minimal variable costs.
c.
with no revenue.
d.
with minimal profit.
e.
at a loss.
70. What assumption does breakeven analysis make that limits its overall usefulness?
a.
It focuses on how to achieve a price objective.
b.
It assumes a company wants to gain a certain market share.
c.
It relies on demand for a product being inelastic.
d.
It focuses only on competitive factors and not costs.
e.
It assumes demand is elastic for the product.
71. Which factor is least likely to affect pricing decisions?
a.
Competitive prices
b.
Legal and regulatory issues
c.
Organizational and marketing objectives
d.
Customers’ interpretation and response
e.
Shifting stock values
72. Which of the following is not a major factor for firms making price decisions?
a.
Costs
b.
Competition
c.
Previous sales
d.
Channel member expectations
e.
Legal and regulatory issues
73. A company trying to position itself as value oriented should not
a.
set prices that are reasonable relative to product quality.
b.
use premium pricing for its products.
c.
set prices similar to those of its competitors.
d.
use any advertising for its products.
e.
consider costs when determining the price of products.
74. Mars Petcare is one of the world’s largest petfood manufacturers. If the strategic goal for Mars Petcare
in the coming year was to ___________ in North America, it should use temporary price reductions.
a.
increase the number of competitors.
b.
gain market share.
c.
decrease volume sold.
d.
increase revenue per item.
e.
decrease the number of competitors.
75. Duds and Suds is a bar with a country and western atmosphere. In addition to the bar, Duds and Suds
has a gift shop that sells western clothing with its logo. Norman is the owner of the business and has
recently enacted temporary price reductions through clearance sales, discounts, and nightly drink
specials. What is Norman most likely trying to do?
a.
raise cash quickly.
b.
decrease costs.
c.
increase profitability.
d.
run off the competition.
e.
create a value image.
76. Marketers generally view ____ as the minimum price a product can be sold for.
a.
fixed costs
b.
variable costs
c.
profits
d.
costs
e.
moderate losses
77. In the long run, the J. F. Smucker Company must view ____ as the absolute lowest price for its Jif
brand peanut butter.
a.
a 10 percent return on investment
b.
product development costs
c.
total costs
d.
advertising expenditures
e.
Nestlé’s prices
78. To maintain market share and revenue in an increasingly price-sensitive market, companies have
focused on quality, used labor-saving technologies, and used efficient manufacturing processes. These
tactics have provided gains in productivity that have translated into ____ for the consumer.
a.
higher costs for the company and higher prices
b.
higher costs for the company and lower prices
c.
lower costs for the company and lower prices
d.
lower costs for the company and higher prices
e.
no change in the costs for either the company or
79. For most consumers, there is an assumed relationship between
a.
price and quality.
b.
value and cost.
c.
internal and external reference prices.
d.
value and price consciousness.
e.
prestige prices and value.
80. Premium-priced products are usually marketed through
a.
complex marketing channels.
b.
intensive or selective distribution.
c.
exclusive or intensive distribution.
d.
exclusive distribution only.
e.
selective or exclusive distribution.
81. Since Victoria’s Secret has decided to use nonprice competition, it distinguishes its brand through all
but which of the following?
a.
distinctive product features.
b.
exceptional service.
c.
rebates.
d.
variety and selection.
e.
product quality and style.
82. The types of prices that appear most often in ads are ___; while the types of prices that occur least
often in ads are ____ prices.
a.
reference; comparison
b.
discount; cost-plus
c.
bargain; premium
d.
comparison; cost-plus
e.
sale; reference
83. Which of the following products is most likely to involve personal selling?
a.
Blenders at a department store
b.
Riding lawn mowers
c.
Kindle Fire
d.
Picture frames at a hobby supply store
e.
Footballs at a sporting goods store
84. The amount of profit a channel member expects depends on
a.
the amount of discounts for large orders provided by the producers.
b.
the number of channel support activities provided by the producers.
c.
what the intermediary could earn if it were handling a competing product instead.
d.
the type of distribution channels involved.
e.
the amount of effort required to carry the product.
85. What a price means or what it communicates to customers is called
a.
reference.
b.
response.
c.
interpretation.
d.
internalization.
e.
signaling.
86. The degree to which the price of a product enhances a customer’s satisfaction with the purchase
experience and with the product after the purchase is part of their
a.
response.
b.
reference.
c.
interpretation.
d.
price satisfaction.
e.
price-consciousness.